Card Factory plc

Good morning. Thank you for joining our FY20 results presentation for the year ended 31st of January 2020 in what is the most extraordinary period and coming to you all virtually. Chris and I are together in Wakefield, socially distanced of course, and our intention is to take you through a very brief 30 minute update and then to open this meeting for Q&A. So as per the agenda on slide one, And as is our normal approach, I will provide a quick update and then Chris will present the financials. I will provide a business and strategy update and we will then follow up with any Q&A. I would like to remind you that we will have a second virtual presentation on our strategic plans on the 28th of July in the afternoon, where you will hear from other members of the Executive Board who will share the future plans. Clearly at that point, we will also be able to provide you with an update on stores trading as our stores remain closed at this time in line with government guidance, but we will commence a reopening plan if it is safe to do so from the 15th of June. To begin, let's turn to slide three, highlights. By way of introduction for the year, we saw a resilient growth in total sales in line with other retailers who were reporting challenging high street conditions. The growth in total sales in stores including a net new 50 stores was also complemented by online sales growth for CarTractory.co.uk, three franchise stores experiencing good sales, further expansion of sales to Aldi and the addition of Matalan as a concession format. We also saw the commencement of the rollout in Australia from the original nine trial stores by 70 stores per week starting at the 13th of January. Despite ongoing headwinds and some one-off costs, which we spoke about at the half year, including storage and Brexit stock, we did make progress on our business efficiency and cost mitigation programs. but these did not fully mitigate the cost headwinds that we experienced. Across the year, we refreshed the card factory strategy and tested core elements which are targeted on strengthening the UK proposition and finalising the elements of our international push. In recent weeks, clearly our focus has been on the business during COVID-19, but most importantly on the health and safety of our colleagues and customers today and going forward. I'll hand over to Chris to discuss the financial elements of performance.

Thanks, Karen. On slide four, the FY20 financial performance for Card Factory Group, the KPIs, headline KPIs, Highlights on page 5, revenue grew to £451.5 million with underlying profit for tax of £67.2. Like for likes was slightly down at 0.5% and the leverage ratio was roughly in line with the prior year. If we move to slide six, which effectively gives the financial summary, overall revenue grew by 3.6%, driven by 50 net new stores online and retail partnerships, with the like for like, as I said, minus 0.5. Retail partnerships are not fully annualized at 3.1 million and underlying EBITDA which is post IFRS 16 is 125.9 million with pre IFRS 16 being 81.2 million. Overall in terms of dividends ordinary dividend of 2.9 pence was paid and a further special dividend of 5p in the year. In terms of capex, this was lower than guided at the £14.5 million, and net debt actually came down slightly to £289 million. And the leverage ratio was in line with the guidance previously set at 1.76 times. If we move to slide 7, which is around the life-like assumptions, so overall we've seen the car factory stores had a negative 0.7%. LFL, while online move forward 14.8%, resulting in the net minus 0.5%. However, we managed to offset the footfall decline because of the macroeconomic backdrop in terms of growing the average basket value. And if we contrast this with a number of different UK footfall trackers, which have shown that footfall was down minus 1.3 to minus 4.7, we've largely offset that reduction in footfall. Moving to the divisional analysis on page eight, as I say, the overall revenue grew by 3.3%. That was out of the net 50 new stores that we opened that we still get a good return on capital from. And we've continued to see some impact in the year on EBITDA just in terms of the stock build that we're seeing in terms of Brexit planning, which I'll come on to later on the BIP slide. Moving to slide 9 on the divisional analysis of online, overall card factory online grew by 14.8% while getting personal was disappointing at minus 9.8%. However, the cost of customer acquisition and promotional led competitor pricing has continued to be an issue. There will be a further update in terms of the longer term plans with the business which Karen will come on to. Moving to slide 10, the divisional analysis of retail partnerships. Overall, in the period, 3.1 million of additional revenue was given to these channels around Aldi, The Reject Shop, Matalan Trail, and the three franchises in Jersey, Guernsey, and Gibraltar. Overall, these are slightly dilutive at product margin level, but are actually accretive at both the pound and percentage EBITDA level. And this number of 3.1 million obviously is not fully annualised in the year. If we turn to page 11, best in class margins, overall within the year there was a 250 basis points impact. The main areas of that, 210 basis points were around the costs of goods and store wages. In terms of the costs of goods, there was some shift in product mix because of the strength of performance of non-card and also the impact of additional stock provision. On the basis, we were holding 15 million more stock at the half year, which I'm pleased to say is now under the prior year at the year end. So good work through there. And store wages, we did mitigate a large proportion of the national living wage, but not all of it is where that 90 basis points is coming from. Other direct expenses, again, the increased holding costs of stock meant there was some impact on direct expenses. Furthermore, on operating expenses, we did put some investment into IT infrastructure, new HR systems, time and attendance, and data warehouse, but all things that make up part of the strategy going forward. Overall, in the year, there's about £4.4 million of costs in the P&L as one-off. non-recurring costs based on the stock build numbers. So overall the EBITDA percentage was 27.9% EBITDA post IFRS 16 and 18% pre IFRS 16. Just turning to page 12 in terms of the free cash flow of the business. Strong cash flow generation again. You can see now this is a post IFRS 16 cash flow where you can see the depreciation line 52.8 and a negative on lease liabilities of 41. So the net of the two is effectively the depreciation amortisation which does include the write off of the goodwill. And running further down from there, working capital was negative of 2 million in the year. It should be bared in mind that we had 16 million that landed into the year at the year end of FY19, which was just to do with the timing of working capital. Corporation tax 14.6 was just the timing of the on account payments and capex as stated before 14.5 million under the guidance that was given delivering a free cash flow of 47.1 million leaving a net debt increase of 1.8 million during the year. Moving on to CAPEX on slide 13, the key strategic investments within the year were on the vertical integration where we invested in a new foiler which effectively brings down the cost per item in terms of the foiling of cards and also the new printing press which has doubled our speed and capacity which allows us to do shorter print runs and higher volumes. We've looked at the replatforming of Card Factory in the year of 2 million and other commercial initiatives to improve sales densities and supply chain technologies around voice picking. In terms of the reoccurring CapEx, largely that is in line with prior years in terms of the net 50 stores opening. And in terms of guidance for FY21, at this current point, we're looking at still doing the key strategic investments, such as our consolidation of warehousing, which has OPEX improvements, e-comm and things like data warehouse, which will add value to the business in the longer term. A new store's investment has been restricted to the legally exchanged properties of only seven. We'll give further updates in the longer term on stores later on. Turning to slide 14 on dividends and capital policy. As I mentioned earlier, 2.9p was the ordinary interim that was paid and a special dividend of 5p. Due to the impact of COVID-19, no final dividend in FY20 and No dividends are currently expected in FY21 while we look to protect the balance sheet during these uncertain times. The overall capital policy will not change in terms of the 1 to 2 times in pre-IFRS 16 terms and the circa 1.3 times to 2.8 times in a post-IFRS 16 world. However, in FY21, due to the impact of COVID, we will see us peak above that two times in the short term. Moving to slide 15 on liquidity update, I'm pleased to say in terms of the group, we've got an existing 200 million revolving credit facility until October 23. We've also secured the option to have access to COVID corporate financing facility through the Bank of England. And during the period though, between now and effectively to June 21, we have got replacement coverants and waiver existing ones on total net debt, monthly cash burn and last 12 months underlying EBITDA. The other agreed terms to point out is that equity distributions and acquisitions during this period until June effectively will be restricted until the leverage is under two times and there is no outstanding commercial paper under the CCFF. These numbers are all on a pre IFRS 16 basis. In terms of cash conservation, we've took all the measures you would expect in terms of the business. In terms of managing stock intake, we've looked to take advantage of the options the government are giving around PAYE, National Insurance and VAT. deferrals business rates holidays the option in terms of furlough employees during this time and obviously entering the important rent negotiations with landlords and looking at the deferral or discounts to rents However, the board overall is confident the group has access to sufficient liquidity for navigating the times ahead. In terms of FY21 guidance, at this point we're not looking to give guidance until we've got more certainty on the trading performance as and when the stores start to reopen post the 15th of June. So that's it on the financial update. I'll just pass back to Karen to give you the business update on slide 16.

Thanks, Chris. So taking you through a business update, the intention here is to provide you some flavour of what has driven the financial performance across the year. So if I can turn your attention to slide 17, there were three things that we focused on in the year. Firstly, maximising the financial performance and delivering the operational plan in year. Secondly, continuing to invest in key parts of the business to support longer-term growth. And whilst we were doing that, Three, we were developing and testing the five-year strategy to ensure that it will deliver tangible and sustainable results. I'd like to take you through our in-year business performance in line with the current four pillar strategy. So firstly, on slide 19, like-for-like sales. We delivered a reasonable sales performance in a challenging year for the high street, growing both our volume and value card market share in the mature and stable UK greeting card market. Using our EPOS data enabled us to grow average basket value and mitigate partly the fall in high street footfall. In addition, we had our third year of successive volume and value growth for our key seasons of Valentine's and Mother's Day in both card and complimentary products. Our Christmas performance was subdued, as reported in our Christmas trading statement, due to a combination of three things. A tough high street with political uncertainty, some decline in Christmas as a season, and we did get some things wrong in stores in particular, some of the key captions and ranges for single cards. Turning to new store performance on slide 20. For new stores in the year, we opened a net new 50 stores and we also took the opportunity to close and or relocate some underperforming stores as a part of our biannual store review process. We also opened six new stores in ROI now bringing us to 13 stores and in that market our business is performing very well for us and we see more opportunities going forward to access white space for greeting cards in the Republic of Ireland. We have a good opportunity on our stores with the average lease length to lease break being 2.5 years which provides us with significant flexibility to respond to local changes in towns and shopping venues and to take advantage of ensuring that we always have the most appropriate leases. Also in the year we grew sales through our Aldi supply arrangements and commenced Matalan partnerships and whilst these are in their infancy we see them as good opportunities to extend our market share going forward particularly in the area of impulse shopping for customers who just wish to pick up one or two cards and would not travel to a card factory location. We continue to see no cannibalisation from these retail locations against our own stores. Turning to slide 21 for business efficiencies. Our business efficiencies program in the main, we delivered the majority of programs that we had in what was a very ambitious year, including the introduction of new printing capability, which enabled faster production with less labor. We rolled out voice picking in the warehouses and progressed further on our efficiency program in terms of the way we pick and deliver stock to stores. We removed over 300,000 hours in stores through the introduction of efficiencies in non-customer facing tasks such as auto replenishment of cards rather than colleagues having to manually order them. We also introduced electronic store rotors and reduced back office processes. Our program of ongoing improvement in rent, stock and cash loss continued in the year with good results in all areas reducing our costs in stores. Having delivered on our improvement program, the impact of these savings overall was then impacted by some one-off costs, which Chris has covered in relation to stock in particular. Our fourth pillar, online, is covered in slide 22. Across the year, we continue to trade from our two websites, cardfactory.co.uk and Getting Personal. On Card Factory, we saw good growth in both traffic and conversion, the sales of which are for items predominantly sold online and not available in store, although we did change this offer with the advent of COVID-19 rather successfully. A good level of newness through redesign of products saw strong sales in the year. and our new platform that will launch in the first half of FY21 will significantly improve our customer proposition and enable us to become a true multi-channel retailer. Getting Personal on the other hand delivered poor like-for-like sales and experienced further increases in the costs of customer acquisition. As a part of the strategic review of that business, we made the decision to integrate the brand and its operation under the new Card Factory platform. This will enable us to maintain sales but remove a significant cost of operation. We have already commenced that integration which will see us leverage the investments and structure supporting Card Factory Online and the transition will be completed in second half of this financial year. I'd like to turn quickly to the greeting card market. For those of you who have followed us for some time know that we always update the market information on an annual basis. So the summary is on slide 24. This year, our research has shown that for the fifth year in a row, we are seen as the number one retailer for value for money. We continue to deliver what matters for customers in this market through the delivery of the top five factors that influence card shopping choices. And we continue to sell one of every three greeting cards in the UK market. Slide 25 shows the market in terms of value and volume. The fundamentals of the card market remain intact. It is large and broadly stable. Our updated analysis shows that the increasing average price of cards fully offsets the very modest year-on-year volume decline. We see interesting areas of growth that are consistent with wider consumer trends, such as the growth of new and non-standard occasions, offsetting a long-term decline in Christmas card giving. and a growing minority of shoppers now buying cards on impulse rather than in planned shopping missions. These present new opportunities to our business which has increased its volume share once more to 33% of single greeting cards despite increasingly aggressive competition. In terms of our positioning in the market, slide 26 shows this. So in addition to the market itself, Card Factory has continued to build on its defensible position representing the leading position of value for money, quality, price and its wide range of cards. This is what we have in the past called the clear blue water positioning and we continue to lead in the market on these dimensions of price and quality against discounters, grocers and the specialists. As I've said across the year, the Board has been focused on reviewing and refreshing Card Factory's strategy. We have already advised of the plan to share this extended strategy on 28 July. During this strategic review, we have undertaken a significant amount of customer research, analysed in detail our EPOS sales data and looked at the various markets using customer insights both in the UK and internationally. We have seen three shifts in data and insight that provide a significant opportunity. Firstly, changed occasions. So a growth in every day and other seasons for card giving and a slight reduction in Christmas card giving. Secondly, mission changes. So that's a move of customers into impulse card buying from a planned visit. And thirdly, channel shifts. a faster growth of online shopping for cards. Our refresh strategy takes account of these changes and therefore provides us with the new opportunities for the card factory business. We see the business growth opportunity around three key elements. A winning card led proposition, making that available to customers in more markets however they wish to shop and by sustaining and building on our existing model. If I turn your attention to slide 28 which outlines building a winning card led proposition. For our business to succeed, we're clear that our offering must be based around having a winning card led retail proposition. To deliver this, we will be customer led and leverage the substantial data that we have available of both existing and potential customers. We have used that data to develop clear customer profiles as the one shown on the screen, enabling us to clearly target the opportunity. Leadership and card choice will mean that we are offering the widest range of cards with ongoing improvement and refreshment to those ranges. We'll create complementary categories to fully capitalise on every customer visit into our stores and using the factors of success that have driven our performance in the past. Marketing and loyalty programs will be introduced to address certain brand perceptions, broadening the potential number of Card Factory customers and maximising their spend in stores. And finally, a distinctive and defensive price strategy with a continual assessment of our pricing to ensure that we offer market-leading value for shoppers at attractive margins for Card Factory. We have a clear strategy which we have tested certain elements of. On slide 29, having developed the proposition, we plan to make this available in more places irrespective of how the customers wish to shop. One of the key drivers behind Card Factory's market leadership to date has been its substantial and growing 1,000 plus store estate. Market research has shown that there is an opportunity to increase market share further by increasing the availability of Card Factory products through complementary alternative formats and initiatives. There are five different aspects to increasing coverage. Firstly, continuing to review in detail both the current UK store estate and where we are planning to open new stores to ensure that we're in the best possible locations, be it on the high street or increasingly on retail parks. Whilst our store rollout program remains an important part of the growth strategy, the pace and scale will be considered as we assess the implications of COVID-19 on store trading. We will begin trialling new formats where localised demand exists, which may either be smaller in scale or a different character to the main card factory fascia. We'll also capitalise on the growing trend of impulse purchasing through partnerships with retailers in suitable locations and with complementary brand propositions. We are encouraged by the progress we've seen with this model through the current Aldi relationship and ongoing trial with Matalan. As a reminder, today we have 493 Aldi stores retailing Card Factory products. We have different formats in Matalan stores and are looking for other ways to enable more customers to access our ranges. These are not cannibalising our existing estate as it captures the customer who is just looking for an impulse card purchase. We'll also be offering our ranges retail expertise and the card factory brand internationally, leveraging the infrastructure that we have. We've opened in Australia with the Reject Shop showroom. following the initial trial and we're now trading for 355 stores with 170 being opened at the end of FY20. And finally, in order to enable all customers to have access to Card Factory products, we will be looking to increase market share through online transactions. Whilst the number of online transactions is forecast to grow, it is still relatively modest at 8% of UK card volume. We will launch the new web platform in half on FY21 allowing us to significantly grow our online presence and leverage our store estate, thereby significantly strengthening our ability to trade as an omnichannel retailer. So on slide 30, we outline sustaining and extending our competitive advantage. Card Factory's vertically integrated business model is key competitive advantage and allows us to deliver both quality and value for our customers at attractive margins for the business. We are intending to continue to invest in this business model to sustain this important differentiator. The focus will be on firstly the retail operating model transformation. We've identified a number of additional opportunities across the entire estate from designing a card or a gift through to manufacturing and then into the store itself where we know we can deliver for our customers more efficiently. This will enable us to achieve the lowest cost to operate, especially in relation to the store operating model. Technology will play an important role in the ongoing improvement of this and allow us to leverage infrastructure to support all channels of trade. Secondly, we will be focused on manufacturing and supply chain investments. We have already started building the infrastructure required to support new sales channels. channels with retail partners both in the UK and internationally. We will invest in our vertical supply chain and manufacturing technology to improve product margins and lower our operational cost base. In addition, we are assessing the opportunity to bring back the manufacture of more handmade card ranges into the UK, increasing the flexibility to which we can respond to customer demand. So that's a summary of our refreshed strategy work. We will share more detail on the strategy with the wider executive board presenting to enable you to get a view of growth impacts from each of these strands. That will be delivered on the 28th of July and we're planning to do this virtually at this stage of course. I'd just like to give you an update on our position as a business post COVID-19. So if I can draw your attention to slide 32. Pre-COVID, we had had a satisfactory start to the year. In fact, we'd seen our fourth successive year of growth for Valentine's Day in terms of both volume and value for cards. Since the closure of our stores, we have continued to trade both of our online businesses and we've seen a significant growth in visitors, conversion and sales. Since the lockdown, Card Factory website has grown at 302%, which means they've got 153% of growth year to date. Getting Personal has seen a growth of 68%, representing a 27% growth rate year to date. In response to this increased demand and to ensure we had appropriate social distancing in our fulfilment centre, we sprung up a second unit in Wakefield using part of one of our existing warehouses. In addition, we've continued to supply both Aldi and our Australian partner, The Reject Shop, with card ranges. Whilst both these businesses have in themselves been impacted by COVID-19, both are seeing strong sales of greeting cards during this period. Following government guidance to close all of our stores on the 23rd of March, Over 90% of our colleagues have been furloughed under the government's job retention scheme. Having said that, we do have parts of the operation continuing to work, but we have enabled the majority of our colleagues to either be socially distanced or be working from home. Given the recent announcements by the government, we are preparing for the phased reopening of our stores, ensuring that we are compliant with the requirements of COVID secure. We have prepared extensively for the reopening and we're currently working on changes to our store operations that will ensure both our colleagues and customers are able to be safe in our shops. We expect to be able to facilitate appropriate social distancing in the majority of stores. Over the past number of weeks, the team have worked through the detail of social distancing, actually working in shops to ensure that we've got the appropriate equipment, PPE and anything else we need to plan for the phased reopening of our stores in a safe manner. Our priority all the way through this has been to ensure the ongoing safety of our colleagues and our customers. It is clear that in some shops, social distancing could impact our ability to trade. However, the teams are working through a plan for sales optimisation and are trialling new methods of store trading which will enable customers to have to visit less frequently but be able to buy more in each visit. We are intending to conduct trials in the first weeks to inform us more fully of the implications and any additional changes that we may need to make. Our board and management team have reacted rapidly to the very dynamic situation and I am confident that we will exit this crisis with an operating model and customer proposition that will make Card Factory the customer's first choice for greeting cards everywhere and for all occasions, however they wish to shop. Of course, given the uncertainty, we are unable to provide specific guidance on future performance, but we will monitor performance in early days of store trading. So in summary on slide 33, we've delivered a reasonable sales performance in a challenging year for the high street. We've grown both our volume and value card market share in the mature and stable UK greeting card market. Our profitability was, however, impacted by a number of recurring cost pressures and other one-off additional operational costs which we were not able to fully mitigate. Across the year, we also developed a refreshed long-term strategy for future profitable growth. The strategy is focused on strengthening both our market position and the financial performance of the UK business. During the second half of the year, we tested our pricing positioning elasticity, we trialled new customer propositions and developed partnerships to grow our UK market share through concessions and supply arrangements. These partnerships have enabled us to serve card shoppers when they are on impulse-driven purchases away from our retail stores. We have developed further our online infrastructure and capability to ensure that we're set to deliver in what is increasingly becoming a multi-channel environment. We agreed a five-year contract with the Reject Shop in Australia following a successful concession trial. We believe there is... sufficient opportunity to leverage our current infrastructure and supply chain and to build market share in both the UK and other card markets across the world under the Card Factory brand. I look forward to sharing in detail exciting plans for growth on the 28th of July. And that brings to a close the formal presentation